Capital markets are crucial in financing business turnaround

Discussions around support for Micro, Small and Medium Enterprises (MSMEs) has taken centre stage with reduced lending rates by banks and non-bank financial institutions and reduction of taxes seen as a short-term soft-landing solution.

This makes a lot of sense with the strategic priority and policy interventions to keep them afloat as Covid-19 ravages the economy. With the Central Bank of Kenya applying monetary policy tools such as the Central Bank Rate and Cash Reserve Ratio to increase money supply as well as moral suasion to get lenders to lower interest rates, there is a lot of optimism in this strategy.

The reality however is that lending institutions will not advance credit that easily to MSMEs and are expected to apply a preferential risk-based approached, including proof of adversity.

The establishment of the National Treasury and Planning-driven Credit Guarantee Scheme to provide MSMEs with credit guarantees and credit enhancement mechanisms in lieu of collateral requirements, should now be a top priority.

This fact aside, there is global consensus that the world economy will ultimately rise from the ashes, like the proverbial Phoenix, just as it did after the Great Depression of 1939, the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008.

The key question to ask however is: what would be the most appropriate funding option to take these firms back from their economic life-support machine, after this scourge is under control? This is where the capital markets fit in perfectly.

Globally, the capital markets play a vital role in mobilising long-term funds and facilitating economic development. Long-term capital comes in the form of equity and debt financing.

We have recently witnessed a resolve to produce Personal Protective Equipment locally to complement imports. Innovation has also been stepped-up with Kenyatta University developing ventilators, even as companies shift from their traditional business lines to meet new demand, post Covid-19. Toyota Kenya has developed a ventilator and is ready to produce twenty units daily upon receiving necessary approvals.

New businesses require cheaper long-term funding-capital markets- to prosper and create jobs. Universities could set up subsidiaries or the students could set up companies and access cheaper funding through the capital markets.

New businesses are expected to mushroom as Kenya begins its path towards economic recovery and will have similar opportunities for long-term financing.

The basic form of equity funding is Initial Public Offerings, while debt financing is through capital markets products such as corporate bonds and medium-term notes.

As the firms grow, there will be other structured capital market products at their disposal to raise additional capital and manage risks, among other business strategies. These include Asset-Backed Securities, Covered Bonds, Green Bonds, Credit Linked Notes and Derivatives.

The National Government in close collaboration with the Capital Markets Authority (CMA) has created an enabling policy, legal and regulatory environment to support long-term capital raising. The Growth Enterprise Market Segment established in 2014 provides an attractive platform with reasonable prudential and market conduct requirements for MSMEs to list. Further there are tax and non-tax incentives available to potential and existing issuers/corporates. The most recent are tax amnesty on penalties and interest accruing to MSMEs over specific timelines, as well as reduced corporate tax based on the percentage of shares available to the public. On the debt side, there are specific tax incentives for infrastructure and green financing.

For novel innovations there is an excellent opportunity to test the most transformative Financial Technology (FinTech) business models, products, and innovations in the CMA Regulatory Sandbox environment, building on MPESA’s success. With the lessons learnt from pay cuts and job losses, such innovations present a self-employment avenue for many Kenyans.

While it may still be too early to tell the long-term implications of COVID-19 for financial markets, once normalcy is restored or a new normal is in place, the capital markets will definitely stand out as the better option for accelerating return to the path towards achieving Vision 2030.

Capital markets funding opportunities have been available for the past fifty years. While the more shrewd enterprises have tapped into it, Kenya is yet to reach optimum product uptake sufficient for economic takeoff as has been achieved by our pre-independence peers like Singapore and Hong Kong.

MSMEs and other private and public enterprises need to start positioning themselves to leverage the capital markets to support their recovery and by extension, Kenya’s economic recovery path. As the Government fast-tracks the operationalization of the Kenya Credit Guarantee Company Limited, its scope should be extended to cover MSMEs that opt for market-based debt financing.